Smith Company Has Total Assets, Liabilities, and Shareholders' Equity of $20,000

question 68

Essay

Smith Company has total assets, liabilities, and shareholders' equity of $20,000, $7,000, and $13,000, respectively, at the beginning of 2010. At the end of 2010, total assets, liabilities, and shareholders' equity were reported at $16,000, $5,000, and $11,000, respectively.
A. How much additional debt can Smith incur and still have its debt/equity ratio remain less than or equal to 1.00?
B. What information does the debt/equity ratio provide you?

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Definitions:

Merchandise on Account

Items purchased on credit, where payment is made at a later date, often recorded as accounts payable.

Collection on Account

This term refers to the payment received by a business from its customers against the outstanding invoices or credits.

Journal Entry

A record in the accounting ledger that represents a single transaction and its effects on various accounts, detailing debits and credits.

Subsidiary Ledger

A subsidiary ledger is a detailed ledger that contains account information related to a specific master ledger account.